Wk 7 Discussion (Investigating Fraud) - Post 1

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the same individual, whom he knew as Randy Trait, had made three other purchases that

Charles had considered to be somewhat odd in that Randy asked that the items be held for

pickup by him rather than be delivered to the plant. He provided copies of these invoices,

which showed the purchase of a notebook computer, an LCD computer screen, and a digital

camcorder.

When these invoices were compared with the plant purchasing records, it was found that

the files contained only copies, rather than original invoices, for all three purchases. Each of

the file copies reflected the same invoice number, date, and amount as the original invoice,

but differed as to what was purchased. All three purchases had been made using the same

purchase card as the portable DVD player and had been approved by the director of

purchasing, Robert Morton.

Based on this initial information, a complete review was conducted of all purchases made

on the card issued to Randall Trait, the senior buyer, for the past eighteen months, the

period of time he had been employed by Rockside.

Body

This part of the report identifies the employee(s) and other individuals implicated or

involved in the matter. This includes any background information that might have been

obtained about the employee or other parties.

EXAMPLE

Subject Employee #1

Robert Morton

Position: Rockside Industries Director of Purchasing

Work Location: Wayside Plant

Employment Dates: March 19, 1995 to May 21, 2010

Subject Employee #2

Randall Trait

Position: Senior Buyer

Work Location: Wayside Plant

Employment Dates: November 2, 2008 to May 21, 2010

Nonsubject Employee #1

Phil Brothers

Position: Shipper-Receiver

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Work Location: Wayside Plant

Employment Dates: April 11, 1997 to Current

Nonsubject Employee #2

Stanley Lampen

Position: Senior Buyer

Work Location: Wayside Plant

Employment Dates: February 28, 1997–October 15, 2008

Noncompany Witness #1

Charles Front

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Owner/Manager ABLE Tech

Approved Vendor Since June 12, 2005

The body of the report also details the methods used to investigate the matter, including any

document reviews, interviews, and other procedures such as video surveillance. If

necessary, background information can be provided on the department or process involved

in the investigation. For example, in an accounts payable fraud, the document flow might be

described or set out in a graphic to assist the reader in understanding how the process

works.

EXAMPLE

The Wayside Plant Purchasing Department consists of a senior buyer, two junior buyers,

and an administrative assistant. These individuals are responsible for all Wayside plant

purchases not related to travel/entertainment expenses.

The director of purchasing also works out of the Wayside plant; he is responsible for

supervising the purchasing departments of the eight plants located across North America.

Purchase cards are used for individual items with a value of $1,000 or less and purchases of

multiple items with a total value of $5,000 or less (before taxes). All other purchases are

invoiced and are paid for using corporate checks.

Procedures

1. A purchase requisition form is prepared by an employee and forwarded to the buyer.

2. The buyer sources goods and makes the purchase.

3. The buyer enters the purchase into the ATAC purchasing system.

4. The goods are shipped to the plant and received in the shipping-receiving department.

5. The shipping-receiving department enters the receipt into the ATAC system.

6. The accounts payable department receives notice of the purchase through the ATAC

system and the purchase card online statement. Notice of delivery of the goods is also

received through the ATAC system.

7. The purchasing director receives and approves a monthly report from the accounts

payable department detailing all purchases made on purchase cards.

Results

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This section will vary widely depending on the nature of the investigation and the

information collected. An investigation that involves only one incident may be explained in

a sentence or two. In more complicated or extensive investigations, the narrative may be

supplemented by spreadsheets or graphics.

EXAMPLE

A review was conducted of all purchases made with the purchase card issued to Randall

Trait, senior buyer, since he commenced employment with Rockside Industries on

November 2, 2008.

This review identified forty-seven transactions, totaling $39,864.36, that had altered

documentation supporting the transaction. Each purchase had been made following the

proper procedures, except that instead of being shipped to the shipping-receiving

department, the purchases were picked up at source by Randall Trait. The purchases were

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entered into the ATAC system as being received using the employee number of Phil

Brothers, a shipping-receiving department employee. Brothers was unable to verify

whether he made any of the entries, but attendance records confirmed that on seven of the

days on which shipments were entered into the ATAC system, Brothers was listed as being

absent from work.

These forty-seven transactions are contained in the spreadsheet at Tab 1.

The documentation for each of the transactions is located in Tabs 13–59:

1. Invoice from the accounts payable file

2. Invoice from the approved vendor

3. ATAC system printout showing the purchase being made

4. ATAC system printout showing the purchase being received

5. Monthly report from accounts payable signed by Robert Morton

(Note: No purchase requisition forms were located for any of the forty-seven transactions.)

In addition, the review uncovered an additional 113 transactions, totaling $63,511.53, that

also had altered documentation. These transactions were made using a second purchase

card that had originally been issued to Stanley Lampen, the buyer whom Randall Trait had

replaced. This card had never been canceled or reissued to another employee when

Lampen left Rockside’s employment. These 113 transactions are contained in the

spreadsheet at Tab 2. The documentation for each of the transactions is located in Tabs 60–

172:

1. Invoice from the Accounts Payable file

2. Invoice from the approved vendor

3. ATAC system printout showing the purchase being made

4. ATAC system printout showing the purchase being received

5. Monthly report from Accounts Payable signed by Robert Morton

(Note: No purchase requisitions forms were located for any of the 113 transactions.)

In interviews conducted by corporate security, Robert Morton and Randall Trait admitted to

making fraudulent purchases using the two purchase cards. Both denied that there were

any transactions other than those identified in this report.

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Morton admitted that he came up with the idea when Stanley Lampen left the company and

his purchase card was never canceled. When Morton obtained a new purchase card for

Trait, he also kept Lampen’s old card.

Both Morton and Trait admitted that they were childhood friends, and confirmed that it was

Morton who had contacted Trait when the buyer’s position had opened up. They both also

admitted that they had devised the scheme to help out Morton when he got divorced and

was having financial difficulties.

When presenting information in spreadsheet form, it might be useful to prepare several

versions with the data sorted in different ways—for example, by transaction date or

amount. If there are several different types of transactions, they may be grouped by type in

this manner as well. To supplement the spreadsheet, a written description of a

representative sample of the transactions can be given. Generally, it is not necessary to give

a written description of each individual transaction, particularly when they are essentially

the same except for time, date, and amount.

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Follow-Up/Recommendations

This section identifies any investigation procedures that remain outstanding, usually

because they are outside the mandate of the investigator. These might include the recovery

of property that is in the hands of third parties or collection of information held by

vendors/suppliers.

It is also the appropriate place to identify and make any recommendations related to

procedures and controls.

EXAMPLE

1. Purchase requisition forms: These forms are currently prepared by hand and sent to

the buyer making the purchase. After the purchase is made, they are kept by the buyer.

Recommendation: A copy of the form should be sent to the accounts payable

department, which should keep a copy and send a copy back to the employee requesting

the purchase. This would allow for independent confirmation that the employee had

actually requested the purchase.

2. Receiving goods: All shipments received by the shipping-receiving department are

entered into the ATAC system using the employee number of the shipper-receiver. This

number is known to numerous employees outside of this department. This was done to

allow temporary employees to enter shipments into ATAC. In addition, these entries can

be made from any computer terminal in the Wayside plant, not only the shipping-

receiving terminal.

Recommendation: All goods received should be entered into the ATAC using the shipping-

receiving department only. Passwords should be required to prevent unauthorized

employees from making entries.

Opinions or Conclusions in Report

Other than opinions on technical matters, no opinions of any kind should be included in the

written report. If conclusions are not self-evident, then the examiner has usually not

completed a good report. In particular, opinions should not be given regarding the guilt or

innocence of any person or party.

SUMMARY

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The need for an internal investigation can arise in a number of circumstances, including

determining the source of and losses from an alleged fraud, complying with federal statutes,

fulfilling the professional duties of loyalty and reasonable care, ensuring against allegations

of wrongful termination, and mitigating the company’s liability related to employee

misconduct.

When planning a fraud examination, it is important to consider how the company can carry

out the investigation in the most efficient, effective manner. The investigation team should

be limited to only those persons who are vital to the fraud examination process, and may

consist of certified fraud examiners, legal counsel, auditors, security personnel, IT and

computer forensics experts, human resources personnel, management representatives, and

outside consultants.

The purpose of the investigation process is to gather evidence to prove or disprove the

allegations of fraud. As part of the engagement, the fraud examiner may utilize a variety of

investigative techniques such as undertaking covert and surveillance operations, using

informants, “dumpster-diving,” acquiring subpoenas and search warrants, and obtaining

voluntary consent.

Once evidence has been gathered, the investigator must take care to properly preserve the

evidence to ensure its admissibility in a court of law. This involves making a formal record

of the chain of custody and protecting the physical state and attributes of the evidence.

Organization of the evidence is also key. Several computer software programs are available

to aid fraud examiners in case management and reporting.

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A large number of resources exist to assist investigators in gathering evidence. In-house

sources, such as personnel files, phone records, computer and physical files, financial

records, access codes and user identification codes, and security videos, are especially

useful if the fraud examiner can obtain access to them. Additionally, much information

about individuals and businesses can be found in public records.

Fraud examinations generally conclude with a formal written report of the investigation

results. A good investigation report must be accurate and understandable so that others

may know what transpired without having to speak to the report’s author. It should also

convey evidence, add credibility to the investigation, and accomplish the objectives of the

case. To ensure the report appears professional and achieves its purpose, the investigator

must identify the expected reader, include all significant information, and avoid stating any

opinions in the report.

ESSENTIAL TERMS

Duty of loyalty

The requirement that an employee/agent must act solely in the best interest of the

employer/principal, free of any self-dealing, conflicts of interest, or other abuse of the

principal for personal advantage.

Duty of reasonable care

The expectation that a corporate officer, director, or high-level employee, as well as

other people in a fiduciary relationship, will conduct business affairs prudently with

the skill and attention normally exercised by people in similar positions.

Certified fraud examiner (CFE)

A professional who is trained to conduct complex fraud examinations from inception

to conclusion. A CFE has training in all aspects of fraud examination, including

identifying fraudulent transactions, obtaining evidence, and interviewing witnesses.

Attorney–client privilege

The privilege that precludes disclosure of communications between an attorney and

client, but only if the client (1) retained the attorney, (2) did so to obtain legal advice,

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14-1

14-2

14-3

(3) thereafter communicated with the attorney on a confidential basis, and (4) has not

waived the privilege.

Evidence

Anything perceivable by the five senses, and any proof such as testimony of witnesses,

records, documents, facts, data, or tangible objects legally presented at trial to prove a

contention and induce a belief in the minds of a jury.

Covert operations

An investigatory procedure in which the investigator assumes a fictitious identity in

order to gather evidence.

Surveillance

An evidence gathering technique involving the secretive and continuous observance

of a suspect’s activities.

Subpoena duces tecum

A legal order requiring the production of documents.

Search warrant

A legal order issued by a judge upon presentation of probable cause to believe the

items being sought have been used in the commission of a crime.

Chain of custody

Refers to who has had possession of an object and what he has done with it. The chain

of custody must be preserved or else the item cannot be used at trial.

REVIEW QUESTIONS

(Learning objective 14-1) What are some of the reasons a fraud examination should be

commenced?

(Learning objective 14-2) Who are some of the professionals who should be included on

a typical fraud examination team?

(Learning objective 14-2) Under what circumstances might the fraud examination team

include outside consultants?

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14-4

14-5

14-6

14-7

14-8

14-9

(Learning objective 14-3) What is evidence? What types of things can be considered

evidence?

(Learning objective 14-4) What are some of examples of evidence-gathering techniques

that might be utilized in a fraud examination?

(Learning objective 14-5) When handling documentary evidence, what types of

precautions should a fraud examiner take?

(Learning objective 14-7) What types of information can be obtained by examining

internal documentation?

(Learning objective 14-8) What are three characteristics/objectives of a good

investigation report?

(Learning objective 14-8) What are five sections that should be included in a standard

investigation report? What information is found in each of these sections?

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14-1

14-2

14-3

14-4

14-5

14-6

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DISCUSSION ISSUES

(Learning objective 14-2) Who should be responsible for directing an internal fraud

investigation? Why?

(Learning objectives 14-2, 14-6, and 14-7) How can computers and technology help in

investigating a fraud? What kinds of challenges can the involvement of technology

present to a case?

(Learning objective 14-4) Jim Block, CFE, is investigating Randy Smith for his role in a

potential kickback scheme. Gathering evidence about Randy’s financial activity has

been difficult. While on a stakeout at Randy’s home, Jim sees Randy’s wife take out the

garbage and place it on the curb. Jim steals the trash bag, sorts through its contents, and

discovers multiple bank statements that provide details about some of Randy’s illicit

financial transactions. Is Jim’s acquirement of the bank statements legal even though

there was no search warrant?

(Learning objective 14-6) What are some considerations a fraud examiner should keep

in mind when organizing documentary evidence? Which method of evidence

organization is preferred?

(Learning objective 14-7) An investigator is looking for information about some vacant

land that may be owned by a suspect in a fraud case. What source or sources of public

records would be a good place to find this information?

(Learning objective 14-8) When reporting the results of an investigation, why is it

important that fraud examiners not express opinions in their professional report?

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CHAPTER 15: INTERVIEWING WITNESSES

LEARNING OBJECTIVES

After studying this chapter, you should be able to

15-1 List the five types of interview questions

15-2 Understand how to ask introductory questions

15-3 Explain how to construct informational questions

15-4 Understand the differences between open, closed, and leading questions

15-5 Explain how to close an interview

15-6 Define and explain the purpose of assessment questions

15-7 List some nonverbal clues to deception

15-8 List some verbal clues to deception

15-9 Discuss the methodology of admission-seeking questions

15-10 List the elements of a signed statement

OVERVIEW

In the fraud examination field, there is nothing more important to the successful resolution

of a case than the ability to conduct a thorough interview of subjects and witnesses. While

accountants and auditors routinely ask questions, the queries rarely confront a subject of

wrongdoing. For example, if we return to the fictional case from Chapter 1 of Linda Reed

Collins, who is suspected of taking kickbacks in return for awarding business, fraud

examination methodology requires us to resolve the allegation from inception to

disposition. That means interviewing a number of potential witnesses: her coworkers,

subordinates, superiors, associates, and other vendors. And, finally, it means interviewing

Collins herself, provided we still have sufficient predication to indicate that she has

committed fraud against her employer.

But regardless of whom we interview about what subject, there are five general types of

questions that we can ask: introductory, informational, assessment, closing, and admission-

seeking. In routine interview situations, where the object is to gather information from

neutral or corroborative witnesses, only three of the five types of questions will normally be

asked: introductory, informational, and closing. If you have reasonable cause to believe the

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respondent is not being truthful, assessment questions can be asked. Finally, if you decide

with reasonable cause that the respondent is responsible for misdeeds, admission-seeking

questions can be posed.

Introductory Questions

Introductory questions serve four primary purposes: to provide an introduction, to

establish a rapport between you and the subject, to establish the theme of the interview, and

to observe the subject’s reactions.

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